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Tesla’s ‘superior’ electronic architecture ‘overlooked’ says Berenberg

The analysts also expect Tesla’s Model 3 gross margin to ‘positively surprise’
A Tesla car
The analysts note that Tesla enjoys significant advantage in battery technology

Analysts at investment bank Berenberg said people tended to dwell on the competitive landscape for electric car maker Tesla Inc. (NASDAQ:TSLA), but underestimated the “full extent of Tesla’s technology advantage.”

Tesla’s upswing came amid a vote of confidence from analysts at Berenberg who maintained their US$500 price target and Buy rating on the car maker.

“Imminent competition from traditional Original Equipment Manufacturers (OEMs) is often cited as a key threat to Tesla, but this underestimates the full extent of Tesla’s technology advantage, which manifests in the entire electronic architecture design,” wrote analysts at Berenberg in a research note to clients issued Friday.

“This is a decisive barrier for legacy carmakers. Tesla’s centralised, integrated, technology-driven architecture enables flexibility and OTA (over-the-air) software-upgradeability across the entire domain. In contrast, traditional architectures implement technology additively to the legacy infrastructure, resulting in decentralised electronic control units (ECUs) systems that creates excess complexity and incompatibility,” they added.

READ: Tesla remains a ‘Fresh Pick’ at R.W Baird following high voltage annual meeting

The analysts said this makes it close to “impossible to deploy in-service upgradeability and product enhancements,” which will likely prove to be “increasingly critical” as a “determinant of customer preference.”

Tesla’s advantage and high hurdles for OEMs

“Although OTA technology has existed for some time, it has only been deployed by Tesla to its fullest extent – i.e. in hardware improvement through software updates,” noted the analysts.

“In the traditional industry, OTA capabilities reach little more than telematics and infotainment system updates, even in the most advanced premium cars. The OEMs’ problem is a design concept that shoehorns technology piecemeal into an inflexible infrastructure, resulting in little-to-no interECU communicability or compatibility and a lack of security,” explained the analysts.  

On the other hand, Tesla, with the flexibility afforded “by clean-sheet development, builds the infrastructure around the technology, enabling minimized-time-to-market product improvements” that OEMs are currently incapable of equaling, said the analysts.

Investment thesis

Berenberg not only built its investment thesis around Tesla’s centralised, integrated, technology-driven architecture which enables flexibility but also the Model 3.

The analysts said they expected “Model 3 gross margin to positively surprise.”

“The widespread assumption that Model 3 margins can be directly inferred from Model S/X is inherently and almost totally flawed,” wrote the analysts.

“Substantial gains from lower labor content, as well as capital and material use efficiencies, should allow Tesla to comfortably achieve a margin above 25% throughout the product cycle,” they added.

Read: Morgan Stanley analysts would be surprised if Tesla doesn’t raise capital by the end of 2018

Tesla CEO Elon Musk recently told shareholders that Tesla will be "cash flow positive" during the second half of this year by delivering 5,000 Model 3s with a starting price tag of $35,000 per week.   

Musk indicated his company was “quite likely” to be build 5,000 of the sedans a week by the end of this month. He reaffirmed his forecasts for second-half profit and cash generation based on that target, and said he still sees no need to raise more capital.

According to reports, Tesla is “turning the corner on manufacturing” thanks to the addition of a third general assembly line that completes the process of putting together the Model 3. 

King of battery technology

The analysts noted that Tesla enjoyed significant advantage on battery technology. “We expect Tesla to remain the battery technology leader, as traditional OEMs have shown little effort to commit meaningful capital to battery technology,” said the analysts. “Tesla’s temperature management is the most sophisticated in the industry, allowing better resilience to capacity degradation, and consequently better residual values.”

Tesla shares were up nealry 1% to US$320.60 in pre-market trade on Monday.

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